Wall Street Eyes Frozen Pension Plans, Sparking Debate

A number of Wall Street firms have been discussing how they could buy frozen defined-benefit plans from employers and manage them on their own.

But experts say the current credit crisis may hurt their plans. Citigroup Global Markets Ltd. in the U.K. recently received regulatory approval to take over the frozen defined-benefit plan of Thomson Regional Newspapers. Proponents of the concept believe it could work in the U.S. too.

There are different ideas of how it could work. Under a proposal being floated by Aon Consulting, a number of financial institutions could invest in a pension management company whose purpose would be to acquire and manage pension assets.

That company would manage the pension plan assets until the plan was sufficiently overfunded, at which point it could then start returning a portion of the invested money to its initial investors, says Scott Macey, senior vice president and director of government affairs at Aon.

The concept would benefit employers by allowing them to get pension liabilities off their books. It would benefit employees by keeping the plan funded and would benefit financial institutions by giving them another source of revenue, proponents say. It would also help to protect the Pension Benefit Guaranty Corp. from taking on additional troubled plans.

Opponents, however, have a raft of concerns. “This is about the worst idea that I have seen in some time,” says Damon Silvers, associate general counsel at the AFL-CIO.

Among the union’s concerns is that more employers would freeze their defined-benefit plans if they knew they could sell the assets to a financial institution, Silvers says.

But “that horse is already out of the barn,” Macey says. “Companies are already freezing their defined-benefit plans at a solid pace and they don’t have this option.”

AARP also has concerns about the concept because it changes the employers’ relationship to the pension plan, says Jean Seltzfand, director of financial security issues.

“Employers are in a good position to be the providers of these plans because they use them to recruit and retain talent,” she says. “This kind of gets lost when it’s being managed by a financial institution.”

All of the concerns are valid, says Brad Belt, the former chief of the PBGC and current CEO of Palisades Capital Advisors, a New York-based pension risk management firm.

Rather than reject the idea outright, these concerns provide talking points in ongoing discussions, says Belt, who first came up with the idea when he was at the PBGC and has seen a lot of interest from plan sponsors.

“Let’s not get wrapped up in the overarching concerns,” he says. “Let’s look at this at the granular level and figure out how we can structure a transaction that will address these concerns.”

Belt and Macey, as well as others, have been talking to regulators and members of Congress about restructuring these deals in a way that doesn’t violate tax codes or the Employee Retirement Income Security Act.

On the request of some congressional members, the Government Accountability Office is studying the idea and expects to issue a report on it by fall, says Barbara Bovberg, director of education workforce and income security issues at the GAO.

Despite Wall Street’s excitement, opponents say that the credit crisis will make it difficult for Congress and regulators to approve the idea.“I don’t think that there is anyone in public life that wants to take responsibility for doing to the pension community what the financial services firms did to mortgages,” Silvers says. “And that’s what this is all about.”